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French Frights

Market prices following the French election announcement show how quickly information is processed—and why markets are so hard to outguess.

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June 27, 2024
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Awaken Investments of Aligned Capital Partners

By Wes Crill, PhD Senior Investment Director and Vice President | Investment Strategist

Many investors view government debt as a concern for future market returns. The long-run data suggest country debt-to-GDP has not been correlated with stock market returns. This is likely because debt tends to be a slow-moving variable that investors can observe and account for when setting prices. Markets do not react to circumstances; they react to news. If the government debt is not news, it’s unsurprising it’s not a headwind to stock markets.

Sometimes, however, markets are greeted with news about a government’s fiscal outlook. France’s President Macron recently called for a snap, or unscheduled, parliamentary election. This election opens the door to policy changes that would substantially increase government spending deficits. In the span of just a few days, the cost of sovereign debt relative to peers—represented by the yield spread between French and German bond yields—increased by more than half, from 0.49% to over 0.75% by June 18.

Markets continuously and instantaneously process new information. That’s what makes them so difficult to outguess. But investors can take comfort in the forward-looking nature of markets. Once changes in circumstances are reflected in prices, investors should expect positive returns, regardless of the outcome of elections.

EXHIBIT 1

France minus Germany 10-Year Government Bond Yield Spread

June 19, 2023–June 18, 2024
Past performance is no guarantee of future results. Indices are not available for direct investment. Data from Barclays Live.

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